This blog connects to the AXEC Project which applies a superior method of economic analysis. The following comments have been posted on selected blogs as catalysts for the ongoing paradigm shift. The comments are brought together here for information. The full debates are directly accessible via the Blog-References. Scrap the lot and start again - that is what a paradigm shift is all about. Time to make economics a science.

December 6, 2016

Rethinking MMT

Comment on Bill Mitchell on ‘Our affect is driving us back to a need for continuous fiscal deficits’

Bill Mitchell is right: mainstream economics is a failed approach and irrecoverably lost in the parallel universe of error, inconsistency, feeble-mindedness and aberration.

Bill Mitchell is wrong in believing that MMT is on the right track.

MMT is caught in the PsySoc trap by maintaining that economics is about human behavior. The crucial point is that economics deals not primarily with individual human behavior or society at large.#1 This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory, etcetera.

The first point to realize is that economics is about the behavior of the economic system. Economics is NOT a social science but a system science.

The second point to realize is that all variants of Keynesianism suffer from methodological self-delusion. Davidson maintains: “Post Keynesian models are designed specifically to deal with real-world problems.” And Mitchell adds: “In this tradition, MMT ... is not an imaginary approach that deals with imaginary problems. It is about the real world and starts with some basic macroeconomic principles like ― spending equals income.” (See post)

Time to wake up to the fact that this ‘principle’ is provable false since Keynes applied it in the General Theory (2011). Because of this, the whole analytical superstructure of Keynesianism, Post Keynesianism and MMT breaks apart. From this follows that policy guidance with regard to monetary and fiscal policy has no sound scientific foundation.

What Keynes and After-Keynesians never understood is profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

Because Keynesians/MMTers do not understand profit they do not understand what deficit spending really means: “When government is added to the pure consumption economy then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.”#2 In simple terms: government deficit = business profit.

Whatever Keynesians/MMTers argue about deficit spending is irrelevant. Because they do not understand the elementary economic relationship between deficit and profit, they de facto initiated the greatest profit boost in the history of humankind. The actual distributional problems are ultimately the handiwork of Keynes/Keynesians/MMTers.#3

The self-delusion of MMTers consists in the fact that they complain about the wedge between real wage and productivity and a perverse distribution of income/wealth while the fact of the matter is that all theses phenomena are the direct result of massive public deficit spending, which they propagate.

With regard to economic policy. MMT is not part of the solution but part of the problem.

You are caught in a loop and merely repeat yourself: “As I have said, you don’t seem to be too familiar with MMT, in particular with its foundations, which you misidentify.”

In my post, I quoted Mitchell verbatim: ”And Mitchell adds: ‘In this tradition, MMT ... is not an imaginary approach that deals with imaginary problems. It is about the real world and starts with some basic macroeconomic principles like ― spending equals income.’”

For everyone who can read, “spending equals income” is the foundation = basic macroeconomic principle of MMT.

It is pretty obvious that you cannot read, are not familiar with the foundations of MMT, and have severe troubles with elementary logic.

I have given the formal refutation of “spending equals income” elsewhere. Just follow the references.

This is not news, Napoleon realized it long ago: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

You have serious troubles with logic. You argue: “If I have a store and you spend a dollar there, is this spending of yours equal to this income of mine?”

NO. If I spend one dollar on a product that costs you 5 dollars you make a loss of four dollars. Loss is NOT income, profit is NOT income, only distributed profit is income. Economists in their hereditary stupidity have not figured this out in the last 200 years and this includes MMT and Calgacus.

When you tell me the sun goes up then I can readily agree to this trivial factual statement. This, though, is NOT the point at issue, because the point at issue is that your underlying theory of the movements of sun and earth is false. In other words, your problem is that you are a flat-earther.

Likewise, when you tell me that if you give me a dollar I have one dollar more in my pocket and you have one less. This is not trivial, this is brain dead. What is at issue in economics is the definition of the foundational concepts of income and profit.

If you give a beggar a dollar this is neither income nor profit but a transfer. An economist should know the difference between these concepts.

Again: For the economy as a whole (= macro) the statement spending equals income is FALSE.#1 This is the point at issue and NOT your silly one-dollar micro story.

Flat-earthers/commonsensers/imbeciles are a problem in all sciences but particularly in economics and John Stuart Mill said already all there is to say: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”

Needless to emphasize that the bigots of common sense did not grasp that what Mill told them was the polite version of Piss off!

One outstanding characteristic of the bigots of common sense is to maintain that definitions are more or less arbitrary.#2 This, of course, is NOT the case as scientists are well aware of. Economics, though, is NOT science but what Feynman famously called cargo cult science.

You give me the advice to “focus on areas of agreement and then build on that.” Note that there is NO area of agreement between a false and a true theory. Falsified theories are simply thrown into the waste basket.#3 This applies to MMT.

You ask me now: “So what do you think money is?” Above you said: “I have not looked at your stuff”. It seems that your attention span is that of a fruit fly. The point at issue is that the formal foundations of MMT are defective and NOT the entirely different issue what money is.#4

I said above that economists in their hereditary stupidity have not figured out the difference between profit and income in the last 200+ years.

I should have added “with the honorable exception of Allais.”#5 But this addition does not save economists from scientific hell because it proves that the intellectual Lumpenproletariat is not only unable to solve fundamental conceptual problems but does not even see the solution when it is written in an unassailable formula on the blackboard before their eyes.

The fact of the matter is (i) that Keynesianism/Post Keynesianism/MMT is based upon a set of foundational concepts that is PROVABLE false, and (ii), that the bigots of common sense have not realized this in the past 80 years.

The urgent problem of economics is how to get rid of the intellectual Lumpenproletariat/ bigots of common sense/throng of superfluous economists and, last but not least, Calgacus.

You say: “MMTers disagree with you about what the foundations of MMT are. What you are calling ‘the formal foundations’ is not as important as you think. The definition of money is what is important to the MMTers.”

You are wrong and it is easy to prove. Go to the top of this page to the section labeled Links and then click MMT Primer.#1 You get the TOC of Randy Wray’s book Modern Money Theory and, lo and behold, after the Introduction the next heading reads The Basics of Macro Accounting.

And this is EXACTLY the topic of this thread. And here is the bottom line: The formal foundations = basics of macro accounting of MMT are PROVABLE false.

Your attempt to draw attention away from the pivotal point is ridiculous. Yes, MMTers have written about many other things but this is IRRELEVANT. Because when the formal foundations are false the rest of the argument is scientifically WORTHLESS although it may contain many commonsensical truths to which everybody can readily agree.

This applies also to Keynes who messed up the formal foundations of Keynesianism in a two-liner on page 63 of the General Theory.#2 This two-liner invalidates Keynesianism until this day.

Note that ALL false theories in the history of science have been very commonsensical, which, by the way, is the secret of their persistence. This starts with Aristotle’s theory of motion which is more commonsensical than Newton’s theory. Every bigot of common sense can immediately refute Newton’s First Law which states “an object either remains at rest or continues to move at a constant velocity” and corroborate Aristotle, who said that an object seeks its natural place of rest, by simply throwing a stone.

A theory can NEVER be judged by its commonsensical or ‘realistic’ elements. A theory is judged by the criteria of material and formal consistency. MMT is formally inconsistent.

Everybody can check the proof. This is how science works. Everybody who does their scientific homework agrees that the formal foundations of Keynesianism/Post Keynesianism/MMT are inconsistent. That MMTers do not agree shows only that they are incompetent scientists.

Or, as James Kwak put it on another occasion: “Economism is a logical fallacy ... Intelligent economists know this. Those who don’t realize it are unintelligent. So take your pick between liar and moron.” Or, even better, take both.

The hybrid science

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity or sys-hum.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-component must always be in the foreground. This fallacy compares to Geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand.

There are systemic laws but no behavioral laws. Systemic laws have the same methodological status as physical laws.

Neither Orthodoxy nor Heterodoxy can tell what the systemic laws of the actual monetary economy are.

Whether the outcome of the human/system-interaction is good or bad is a politcal question that lies outside of theoretical economics. Theoretical economics explains how the actual economy works - no less, no more.

First Economic Law ®

Narrative vs.Theory

Psychological, sociological or behavioral assumptionism cannot yield anything other than a gossip model of the world. Second-guessing the agents is not economic analysis.

Storytelling is the original mode of communication in the social realm — except science.

Political economics is storytelling and, by default, the natural habitat of confused confusers. Walrasianism, Keynesianism, Marxianism, Austrianism are social narratives and not scientifically valid representations of reality.

"The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions." (Fisher)

In marked contrast, theoretical economics lives up to the standards of material and formal consistency. A scientific theory is the best representation of reality that is humanly possible.

Paradigm shift

"The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy." (Feynman)

"As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction." (Nell)

"The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory." (Blaug)

"The task of producing knowledge against the grain requires imagination." (Mirowski)

"A new idea is extremely difficult to think of. It takes a fantastic imagination." (Feynman)

"The scientific imagination dreams of explanations and laws." (Peirce)

"It is brilliance of imagination which makes the glory of science." (Evans)

"... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations." (Clower)

The Starting Problem or What are your axioms?

"What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy."

To be replaced (1)

The core premises of Orthodoxy are uncertain and false and this fully explains the failure of the research program.

“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

This elementary syllogism is demonstrably false. The demonstration consists in the proof that Keynes could not solve the Profit Puzzle. Neither did Post-Neo-New-Keynesians.

In the most general terms, the economics paradigm shift consists in switching from the behavior-centric bottom-up approach to the structure-centric top-down approach. This is comparable to the Copernican turn from Geo-centrism to Helio-centrism.

Paradigm shift

Walrasianism, Keynesianism, Marxianism, Austrianism is provable false and this requires the shift to an entirely new paradigm

AXEC-Meme

If it isn’t macro-axiomatized, it isn’t economics.

Consensus

Economics is a science without scientists. Because they are ignorant of the elementary difference between profit and income, the present generation of economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.

Every orthodox or heterodox economist can convince himself/herself that their profit theory is defective.

Because the profit theory is false the whole of conventional economic theory has to be rejected.

"What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse." (McCauley)

No scientist will ever accept Walrasianism, Keynesianism, Marxianism, or Austrianism. These approaches are logically and/or empirically refuted. This is the actual methodological state-of-the-art. Walrasians, Keynesians, Marxians, or Austrians are still at the proto-scientific stage. These approaches cannot be improved, only abandoned.

Economists are a public nuisance because they have an opinion on everything but knowledge of nothing.

Nopopop

This blog does not add to any popular/un- popular opinion.

This blog does not hand out advice about how to avoid taxes, to get rich on the stock market, to be successful in business, to increase the wealth of nations, to run an economy, to maximize welfare, to prevent national/global bankruptcy, to improve the institutional setup of society, to get out of national/global depression, nor about how to save humankind or any subgroup thereof.

This blog is about the true theory of the actual monetary economy.

"In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Redefining economics

Old definition, subjective-behavioral:

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

New definition, objective-systemic:

Economics is the science which studies how the monetary economy works.

From proto-science to science

Political economics is scientifically worthless since more than 200 years

Focus

Science is of primary interest and importance. Scientists are of secondary interest. The general public finds it remarkable that one of Einstein’s peculiar habits was to never wear socks. In marked contrast, physicists find alone his field equations remarkable.

With regard to science most people lose focus easily because of a natural preference for anecdotes over facts or subjectivity over objectivity.

Hence, Schumpeter once considered it necessary to remind his habitually disoriented fellow economists: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Disclaimer

Missing Blog-Reference links: AXEC does not guarantee that their comments can at any time be recovered from where they have been posted intitially because the availability depends on the publication policy of the blog owner which is implicitly accepted on entering a debate. See also: 'Economists: Incompetent? Stupid? Corrupt?'

Texts: Parts of arbitrary length of any of the author's texts is and will be used again by the author in papers, books, websites, blogs, and other media without explicit reference. The right to make corrections or minor textual improvements on reutilization is reserved.

Caution: Do not expect a corroboration of your political view. Neither a refutation. Political economics has been scientifically worthless since Adam Smith. Politics has to be separated from economics because it is categorically different from science.The best science can do and has always done is to prove beyond reasonable doubt that you have been objectively wrong or ignorant until now. Science goes beyond the naive common sense of today and becomes the sophisticated common sense of tomorrow.

Motto

The Scrap-the-lot citation in the intro is from Joan Robinson.

Outlook

To recall, while political economics is storytelling, theoretical economics adheres to scientific standards.

The first task of theoretical economics is to get the axiomatic foundations right. This is what J. S. Mill called the opus magnum. Neither Orthodoxy nor Heterodoxy came up with a reasonable solution until this day. This explains the secular stagnation of economics.

There is no serious alternative to structural axiomatic economics. This is not a matter of opinion but of proof. The sole criteria are material and formal consistency.

All truths are easy to understand once they are discovered; the point is to discover them.

Galileo Galilei

The Profit Law ®

The Law of Supply and Demand ®

Law of Value ®

Employment equation ®

Time evolution of the economic system ®

The Economics God Equation embodies the open simulation of the elementary consumption economy from t=0 to infinity

Major economic policy implication

The price mechanism does not work as standard economics hypothesizes. The axiom-based employment equation states that overall employment increases if the average wage rate increases relative to average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflationwithout rising debt and without artificial capacity growth. To increase the average price relative to the average wage rate and productivity increases unemployment. This is what happens at the moment with the Fed's inflation goal.

Right policy depends on true theory.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Lacking the true theory, economists promote since more than 200 years opinion instead of knowledge.

From microfoundations to macrofoundations

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